ATO Draft Ruling TR2018/D1
In our previous article ' A bit less xenophobia' in 2016, we reported that the ATO had informally (via its not-for-profit news service) expressed a loosening in its interpretation of the 'in Australia' test for charities wishing to maintain key tax concessions including tax exemption and deductible gift recipient (DGR) status.
That welcome development followed the equally welcome abandonment of the former Government's proposed legislation for a much more restrictive approach to those concessions. Those arguing for the restrictive approach apparently considered tax concessions as effectively, a form of foreign aid - needing to be reined in.
In its 2016 announcement, the ATO indicated it would accept an entity as being principally 'in Australia' for DGR purposes if its central organisation and presence was in Australia, even if the money it raised was spent overseas. The ATO has now issued a draft ruling, TR2018/D1, aimed at formalising this flexibility through a formal tax ruling.
The draft ruling confirms:
- DGR status - to be 'in Australia' for the purposes of DGR tax status and thereby being eligible to receive tax deductible gifts, a charity must be established or legally recognised and operating in Australia.
A charity is legally recognised if it is, for example, registered under the Australian Charities and Not-for-profits Commission (ACNC) Act and will be considered to be 'operating in Australia' if it is managed on a day-to-day basis by a structure located in Australia.
This means that even if a charity's beneficiaries and/or activities are predominantly overseas, as long as its day-to-day management and operations remain in Australia, the 'in Australia' test for determining DGR tax status will be satisfied. The draft ruling gives a number of examples of different fact situations and explains the ATO's approach to each of them.
- Income tax exemption - to meet the corresponding condition for income tax exemption, an entity that has a physical presence in Australia must also, to that extent, incur its expenditure and pursue its objectives principally in Australia. (A registered charity that meets the qualifying conditions to be a DGR does not need to satisfy this test.)
In meeting the requirement of having a 'physical presence in Australia' for the purposes of income tax exemption:
- a charity will have a physical presence in Australia if it conducts its range of physical operations in Australia;
- a charity will principally pursue its objectives in Australia where that charity conducts more than 50% of its operations within Australia; and
- for the purposes of testing whether a charity incurs expenditure and pursues objectives principally in Australia, any distributions the charity makes out of gifts or government grants it receives are disregarded. The term 'gifts' is also widely construed in this context.
- The test for receiving a refund on franking credits is the same as for the income tax exemption however, distributions made out of gifts or government grants overseas are not disregarded.
What does this draft ruling mean for your charity?
The draft ruling confirms that if your charity conducts its day-to-day business physically in Australia but engages in overseas activities pursuing its objects, it can still satisfy the 'in Australia' test for DGRs and be eligible to receive tax deductible gifts, provided all other requirements are satisfied. Accordingly DGR charities have much less to fear from extensive overseas activities.
The draft ruling also provides a useful explanation of the ATO approach to the 'in Australia' requirement for tax exemption for non-DGRs.
Australian sanctions laws
Complying with the Australian sanctions laws is no easy task. Sanctions laws are constituted by numerous complex pieces of legislation. There are two main sanctions regimes in Australia comprised of the:
- Charter of the United Nations Act 1945 (Cth);
- Autonomous Sanctions Act 2011 (Cth);
as well as a variety of related regulations.
Different pieces of legislation apply to different countries making it challenging for charities to determine whether aid to one sanctioned country will be equally compliant in another sanctioned country.
Humanitarian aid of most kinds is typically not caught by these provisions which target activities relating to technology or weapons and similar issues. However 'aid' may see charities engaging with a variety of entities or individuals.
One danger of not being across the Australian sanctions laws is that a charity may be unintentionally (and illegally) dealing with a 'designated' person and/or entity (such as a terrorist organisation) in circumstances where the legislation imposes a wider prohibition.
The consequences of contravening the Australian sanctions laws can be damaging for a charity with penalties of up to 10 years in prison and/or a fine of $450,000 for individuals and a fine of $1.8 million for bodies corporate. It is important charities undertake regular compliance reviews for all operations in sanctioned countries.
Tips for determining whether your foreign aid is sanctioned
First, answer the following questions:
- what country will your charity be providing aid to or engaging in an aid activity with;
- what sort of aid will your charity be providing in that country; and
- with whom (person or entity) will your charity be dealing in providing that aid.
Once these questions have been answered, the Department of Foreign Affairs has a relatively user friendly website that briefly explains all the sanctions that apply to a particular country, the link to it is here. The site explains the kinds of activities that are sanctioned.
To determine whether the person or entity your charity proposes to deal with is a 'designated' person, look to the consolidated list prepared and updated, from time to time, by the Australian Government.
There are also legal prohibitions on charities entering certain zones in foreign countries.
Our not-for-profit team regularly advises on regulatory and tax issues affecting the sector.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.